Shareholders in Aim-traded clean energy investment company Leaf Clean Energy (LEAF:32p) don’t have long to wait to find out whether the company has been successful in its appeal against the damages Leaf was awarded last summer in the Delaware Court of Chancery. The appeal relates to the court ordered redemption of its equity stake in Invenergy Wind LLC, North America's largest independently-owned wind power generation company.
Invenergy paid $36.4m (£27.8m) to Leaf last year and deposited $14.2m plus a $1.1m statutory interest with the Delaware Court of Chancery based on a June 2018 final court order that the redemption price payable to Leaf for its stake under a put/call arrangement between the two parties should be $50.7m. However, Leaf’s directors continue to believe that the company is entitled to total damages of $122.2m less $36.4m already received from Invenergy plus pre-judgment interest. Leaf subsequently appealed in the Delaware Supreme Court, which heard oral arguments on 13 February 2019 and will issue its opinion within 90 days.
In terms of Leaf’s current financial situation, the $36.4m cash payment received from Invenergy enabled Leaf to redeem 55 per cent of its share capital at 29.72p a share, through a compulsory redemption in July 2018, so the company now has 52.6m shares in issue. Leaf’s 2018 annual results revealed a closing net asset value (NAV) of $16.65m, or 24p a share, which is made up of the $14.2m additional sum that the Delaware Court of Chancery ordered Invenergy to pay Leaf, and cash of $2.3m. In addition, Leaf owns investments in two other companies worth $1m and has made an $820,000 provision for future contingent costs relating to the court case.
I must disclose more than an passing interest in the outcome of this longrunning saga. That’s because three years ago I suggested buying shares in Leaf at 38p (‘Pointing to a successful outcome’, 19 Apr 2016) after spotting an investment opportunity while I was running my slide rule over Aim-traded investment company Crystal Amber (CRS: 208p), an activist fund that owns 29.9 per cent of Leaf’s issued share capital. At the time, Leaf had placed a $95m valuation on its 2.3 per cent shareholding in Invenergy, suggesting that the stake was worth 50 per cent more than Leaf’s market capitalisation.
To understand why Leaf has pursued this legal case to appeal in the Delaware Supreme Court and why it believes that the claim for $122.2m in damages is warranted, you have to go back a decade to 2008 and 2009, when Leaf originally invested $40m (£30m) in Invenergy convertible loan notes. This was subsequently converted these into equity after Invenergy sold 930 megawatts of wind power capacity for $2bn (£1.4bn) to New York Stock Exchange-listed TerraForm Power (US:TERM) at the end of 2015.
That deal was significant because Leaf’s board believe that the company's equity investment in Invenergy is governed by the 'operating Agreement' it entered into when it acquired the convertible loan notes and that Invenergy was required to either obtain its consent to the TerraForm Sale prior to its consummation or, absent such consent, make a payment to Leaf upon the closing of the sale. The amount of such payment is determined by a formula in the 'operating agreement', which Leaf Clean Energy’s board has calculated to be $122.2m.
Balancing risk and reward
There are three potential outcomes here.
First of all, if the final order of $50.7m made by Delaware Court of Chancery in June 2018 is upheld, then Leaf will only receive the $14.2m (20.5p a share) receivable it has already accounted for in its 2018 annual accounts, plus $1.1m statutory interest costs. On a risk/reward basis, the share price is heavily weighted towards this outcome materialising.
Secondly, Invenergy has filed a cross-appeal relating to its counterclaim to the Delaware Supreme Court, contesting the aforementioned $50.7m final order. Invenergy deposited $15.3m in a court-controlled account pending resolution of these matters and, if successful, the final $14.2m outstanding from the final order made by Delaware Court of Chancery would not be paid to Leaf. This scenario is the least likely outcome given the earlier ruling by the Delaware Court of Chancery in favour of Leaf.
Thirdly, the Delaware Supreme Court overturns the final order of the Delaware Court of Chancery in favour of Leaf. In the best-case scenario, it awards the company its full $122.2m claim. Taking into account the $35.6m already paid by Invenergy to Leaf, this implies a further payment of $85.8m, or 124p per Leaf share. That’s four times Leaf’s current share price. Alternatively, the Delaware Supreme Court could make an award for a sum more than the $50.7m final order made by the Delaware Court of Chancery, but less than Leaf’s full $122.2m claim. Either of these two outcomes are possible, which is why Leaf’s share price of 32p is at a premium to the company’s NAV of 24p a share. The premium is effectively an option on the Delaware Supreme Court overturning the final order of the Delaware Court of Chancery in favour of Leaf.
Admittedly, there is no guarantee that Leaf’s appeal to the Delaware Supreme Court will change the final order made last summer by the Delaware Court of Chancery. However, having crystallized 55 per cent of your original shareholding through the compulsory redemption of shares in July 2018 (‘Leaf Clean Energy’s cash return’, 11 Jul 2018), and given that I feel that the Delaware Supreme Court at the very least is going to uphold the final order made by he Delaware Court of Chancery, I feel that it’s worth running with the balance of your holdings ahead of next month’s court ruling, as there is potential for a positive outcome. Hold.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed onwww.ypdbooks.com.
